Corporate Pensions Could Suffer From Lower Interest Rates
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Here's your money briefing. I'm J.R. Whalen at The Wall Street Journal in New York. Sure, if the Fed lowers interest rates, big banks will take a revenue hit. But so will corporate pensions. And that hits home. We'll check in with The Wall Street Journal columnist in a moment to go over some details. First, some money in market news that you should know. Good news if you're a natural gas customer. The prices that traders set that determines future pricing are at their lowest level since July of 1999. Prices typically rise in the summer as demand for electricity spikes. To run air conditioners and supply disruptions from tropical storms, they drive natural gas prices up as well. But the people who set futures prices are confident that the heat wave that's gripping the Northeast and Midwest is going to ease at the end of July.
Prices also rose after Hurricane Barry forced some offshore platforms in the Gulf of Mexico to temporarily shut down. But that disruption was partly offset by power outages caused by Barry, as well as the blackout that hit parts of New York City over the weekend.
How could a Fed interest-rate cut hurt corporate pension funds?
The U.S. Energy Information Administration says that the August natural gas output would increase year over year in each of seven major regions around the country, and that would keep the country on pace to top 2018's production record. And Miami Dolphins owner Stephen Ross and his wife, the jewelry designer Kara Ross, have listed their New York City penthouse that overlooks Central Park for $75 million. The five-bedroom apartment spans 8,500 square feet and sits atop the Time Warner Center at Columbus Circle. There's also a large dining room with marble floors, a wood-paneled den with a fireplace, a library with upholstered walls, and a 42-foot-long living room with floor-to-ceiling windows. And just so nobody takes up too much space in the morning, the master's suite has two marble bathrooms and two dressing rooms.
Another bedroom is used as a gym. Another holds a golf simulator. Now, they're selling the unit, by the way, to move to Hudson Yards on Manhattan's west side, which is the largest private real estate development in the country.
We've told you on a few occasions here on Your Money Briefing how the big banks stand to lose revenue if the Federal Reserve were to lower interest rates. Well, it turns out the effects of lower rates are likely to extend to U.S. corporations and specifically corporate pension funds. I heard on the street columnist Lauren Silva Laughlin is on the line with us to explain. Lauren, corporate pension funds, they had a banner year in 2018. High interest rates and the new tax law at the time really helped that out. But now the landscape has changed.
As interest rates fall, the companies have to recalculate the money that they owe their pensioners. And little tweaks in the interest rate can actually make a big difference. So If a company is expecting the interest rate to be 4% or 5%, that's a lot different than what their liabilities look like if it's 2% or 3%, say. So as the interest rate has fallen, the liabilities that these companies, or they carry on their balance sheets, has grown. And that's really bad news for some of them.
And in terms of higher tax rates, the companies at one time really had an incentive to contribute to their pension funds.
That's right. So last year, they had until the late fall, to essentially give money into their pension funds and have it be tax deductible at a higher rate. So a lot of them rushed to put money in then, as any individual would say who is contributing to their own pension, tax deductible at a lower rate, you're going to put in less money. And that's what they've done this year. So really, it's been sort of a double whammy for pension funds. They have falling interest rates, which is increasing their liabilities. They're putting less money in, which is decreasing their assets. And this has caused an imbalance.
Now, just to go back for a moment to 2018, investors in corporations should pay close attention to how generous pension contributions were because that could impact the earnings reports coming out this year.
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